"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Wednesday, March 23, 2011

I wanted to post a very short set of comments to let some of the newer readers understand why many of us believe that there is a war being waged upon gold by the Central Banks of the West.

Let me start this off by quoting from none other than former Fed Chairman Alan Greenspan more than 40 years ago:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard

What the former Fed Chairman was then saying was that absent a gold standard or some device for restraining the unlimited creation of fiat money, there was nothing to restrain monetary officials from engaging in such activity that would ultimately set in motion a process of inflation, which is really just another name for the erosion of the purchasing power of a nation's currency by debasing it. Inflation was and is in essence, the transfer of wealth from one class to another.

Today we have the Fed engaging in the very process that Greenspan warned against back then. We also have the BOJ and the ECB effectively doing the same thing to an extent.

Unlike Silver, gold is the main metal that most analysts and commentators look to when attempting to decipher whether or not inflation is a serious problem. That means the reference point of gold has become a target for Central Banks which want the world to believe that they can create unlimited amounts of funny money with absolutely ZERO impact on inflation levels. In other words, that they can conjure up wealth and produce prosperity with the electronic equivalent of a printing press and produce no serious inflationary impact by so doing.

A rising gold debunks their hubristic assertions to the contrary for it stands as a silent witness testifying against them. This is the reason the yellow metal is despised by so many Central Banks. It mocks their policies and displays their folly for all the world to see. Central Bankers being the demigods that they are, will tolerate no rivals to their claims of economic omniscience. You see they have actually come to believe that it is their own wisdom and foresight which enables them to see through the fog that hinders and impedes our economic progress and that they are in a unique position to provide the rest of us with lasting prosperity. They attempt to do this by basically providing or withdrawing liquidity as they in their wisdom judge best and by the setting or manipulation of interest rates.

Those of us who believe that it is free market capitalism and the industry and efforts of mankind that produce wealth and prosperity would beg to differ but that is another story altogether. I would add that it is my opinion that the world would be better off without this plague of locusts that actually devour a nation's wealth but the fact is that they are here.

While they are here gold will attempt to move in such a manner that is either blesses or curses their policies. Now we all would love to have our policies approved by the vote of the market but what about those times in which the market frowns on our course of action and refuses to smile upon it? Why this is but a simple matter - attack the messenger! If one can somehow manage to keep the price of gold under wrap so that it does not move sharply higher then one can attempt to make the claim that inflation is not a serious problem. The comments usually go something like this:

"Well Jerry, we are looking at the gold price and from what we can see, that while it is definitely higher, it is not soaring out of control. The market may be pricing in some gradual inflation but the action in the gold price is telling us that any fears of inflation getting out of control are definitely unwarranted. Besides, we all agree that some inflation is a good thing because the alternative is deflation and no one wants to see that".

Imagine Fed Chairman Ben Bernanke testifying before Congress saying that the current rise in prices of many goods is only "temporary" and "relatively modest" if the gold price were soaring beyond $1650 and higher! Do you think anyone would take anything that the Chairman said seriously? Copper can soar higher and most will not notice it. Even if it does, it is generally explained as a positive because we are told it is a sign of strong economic growth ahead. Crude oil and energy prices can rocket higher and that can be attributed to geopolitical unrest among oil producing nations. Food can rise sharply and everyone notices that but such things are often explained away by citing weather conditions, supply constraints, etc. but a rising gold price? How does one explain that away?

The only reason that gold has a sustained price rise is because of a lack of confidence in the monetary system. It does not rise sharply because of such things as jewelry demand or industrial demand - it rises when fear, distrust, doubt, suspicion and uncertainty over Central Bank policy reigns. It rises when REAL interest rates are negative and investors understand the insidious process of currency debauchment practiced by these monetary authorities is underway. It thus cries aloud and issues a warning to those who can hear it and what it shouts displeases many Central Bankers because they are among those who while they despise its message, are all too keenly able to hear that message.

Thus the messenger,the prophet, the oracle, must be silenced or at the very least, his message blunted, toned down, trivialized by whatever means possible. The mechanism employed to do just this is a subject for another time and place. Suffice it to say for now, without the efforts by the monetary officials of the West to discredit gold, it would be trading considerably higher. Even at that however, the ancient metal of kings refuses to go quietly and docilely into the night. It will yet have the final say.

One can clearly see the great effort being applied to thwart the metal from breaking higher. In a freely traded market, it would have already done so. The US monetary authorities are clearly terrified over the implications of a new all time high in gold as it would be the clearest signal yet that their QE policies are highly inflationary.

Goldman and Morgan are going all out to prevent the plethora of headlines that would accompany such a significant development.

The HUI is uncharacteristically strong this morning given the overall weak tone in the broader equity markets. It is a bit tricky reading too much into a market over one day's trading action but today at least, it appears some of those hedge fund ratio trades are being covered.

We'll have to keep an eye on this because there are two sectors that recently have both been looking very good on the charts - precious metals and the oil sector. Some of the oil stocks are weaker this morning but the last week or so they have been perking up. What we might be seeing is investor money moving into the mining shares and the energy sector as a play on future inflation. If that is the case, and I want to emphasize that I am uncertain on this as of yet, the hedge fund ratio trade will begin to be lifted as it will be counterproductive if the hedgies are going to go the inflation play route. That spread trade has been extremely profitable for them over the past couple of years so they are not going to jump out of it unless they are given a strong reason to do so. If they do go down this route, the most logical trade would be to spread off the miners and the energy shares against the broader market. Of course I have been saying this for some time and no one has bothered to listen which explains why I am not a hedge fund manager.

The HUI has managed to not only close the gap under 553 but plow through it in very convincing fashion. It now has a shot at moving toward the next resistance level just below 580.

Seeing it moving higher alongside of both gold and silver is encouraging for the friends of the metals. Let's see how it closes today.

Gold priced in terms of the Euro, or Euro-gold, is moving strongly higher this morning as investors on the Continent are becoming increasingly worried over developments in Portugal and Ireland. Talk is increasing that an EU bailout is very possibly in the cards for Portugal and that is drawing money into Gold over across the pond.

The weakness in the US Dollar has helped to keep a lid on Euro-gold as the Euro has been very strong over the past couple of weeks. That is changing today with the Euro being sold over fears as noted above. With gold moving higher in US Dollar terms and the Euro sinking, that is helping to move the price of Euro gold higher.

As noted on the price chart below, it is moving back above most of the major moving averages and very close to generating a buy signal. From a technician's standpoint, I would like to see it move through the 1040 level although a push through 1030 would certainly raise the alarm bell among some of the shorts.

To demonstrate just how fickle hedge fund sentiment has become, gold and silver are both the recipients of safe haven flows in today's session.

As you are aware, of late they have both been considered "risk trades". When risk was in, gold and silver were generally up. When risk was out, gold and silver were generally down. Of course that is a complete contradiction to their historical role as safe havens but that is how the hedgies have been treating them.

Over the course of the past week, gold has been basically trading in lockstep with the Nikkei as that has been a gauge of investor sentiment towards risk. Today the Nikkei is lower alongside of the S&P 500, but that now has gold going in the opposite direction, namely up.

Bonds are also higher today as is the US Dollar and even the Yen as once again the "risk aversion" trades are coming on. If that were not enough to totally baffle you, copper is moving higher on - guess what we are told - a general move TOWARDS risk! Confused? Join the crowd.

Some of this is due to the fact that crude oil is now trading above $105/bbl with Brent trading near $116. That is creating all manner of worries for the equity side of things and shoving bonds higher on fears of a hit to the global economy. Yet, the precious metals markets are viewing the surge in price as inflationary and that is drawing buying into this sector. Heck, even the HUI is joining in on the precious metals rally for a change.

So let's put in into perspective - the US Dollar is higher, bonds are higher, equities are lower, risk is out but gold and silver are moving higher on safe haven plays and copper is moving higher as a risk trade. Yep - I think I have it figured out - for today. Tomorrow? Who knows?

Regardless, even with the Dollar moving higher, both gold and silver have breached overhead resistance levels on their respective price charts as the bulls performed just when they needed to in order to avoid a round of long side liquidation.

For gold, the breach of $1430 in very convincing fashion is significant. Unlike yesterday, when it took out the level but could not maintain its footing above it, the longs are driving hard this morning and have shoved back the bullion banks to $1440, a mere whisker away from the all time high.

In the case of silver, it has breached $36.50, the barrier that had checked it yesterday. It has now posted a fresh 30 year high in the process.

The key to both metals is whether they can maintain these gains going into the close of the session. If they do, they appear poised to run higher. STay tuned.

If you have benefitted from some of the articles posted here and would like to express your gratitude to Trader Dan for freely sharing some of the market wisdom he has gained over his long trading career, please feel free to Donate.

About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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